Between Ambani And Ambition

For nearly a decade, 48-year-old Om Prakash Lohia has been number two in the domestic polyester synthetic textile business. A member of his coterie admits: This has seriously begun to grate on the poor mans nerves.

All Lohia really needs is a war chest deep enough to allow him to take on Dhirubhai Ambani, the man whos held the number one slot for the last two decades. Lohias mission is to propel the Rs 1,185 crore Indo Rama Synthetics (I) Ltd into the global top five. And even the plunging bottomline on his P&L account hasnt stopped his grandiose Rs 2,560-crore dream.

 

A self-confessed workaholic, Lohia is working 14-hour days to set up a Rs 1,360 crore purified terephthalic acid (PTA) plant in Visakhapatnam by 2000, in collaboration with Mitsui Petrochemical Industries Ltd and Itochu Corporation. Recently, he stunned the industry by announcing that he would rustle up another Rs 1,200 crore to build a polyester fibre plant on the same 400-odd acre plot in Visakhapatnam.

This at a time when market conditions have forced Sanghi Polyester and Modern Syntex to delay their projects, and DCL Polyester and Baroda Rayon to scrap their plans altogether. I hate to say this but Mr Lohia is out of touch with reality, says Ashok Jain, MD, Orchid Textiles Ltd.

Lohia bristles at the mention of falling global PTA prices or the glut in both the polyester staple fibre (PSF) and polyester filament yarn (PFY) markets in the region. The future is not one of excess supply. I wish people would do their homework. The prospects for the industry are bright and investments need to be made now. He adds, Our expansion is aimed at being globally competitive by acquiring the latest technology, global size and economies of scale. According to Lohia, polyester consumption this year will grow to 1.3 million tonnes as opposed to the existing supply of 1.2 million tonnes, leaving a gap between demand and supply.

The demand for polyester in the domestic market is growing at 20 per cent. No one can afford to ignore India which is second only to China, says Samir Thapar, joint MD, JCT Limited and president of the Association of Polyester Staple Fibre Manufacturers. Meanwhile, Lohia is gambling on the growth rate being around 25 per cent. The polyester demand is going to exceed the supply for at least the next three years, as no new capacities are in the pipeline, says Lohia confidently.

Indo Ramas present domestic capacity is roughly 2.5 lakh tonnes, way behind Reliance at 4.8 lakh tonnes. But if Reliance sits still and Lohia can find the funds to set up his forward integration polyester fibre unit, the whole scenario could change. The proposed plant could add roughly 2.2 lakh tonnes to Lohias polyester capacity, and put it on par with Reliances capacity.

Lohia also scents opportunity in producing PTA, the preferred raw material for polyester. Right now Reliance with its capacity of 6 lakh tonnes a year, is the sole domestic producer of PTA, part of which it uses for its own consumption. India currently imports more than half its PTA requirements. But it is uncertain whether Indo Rama can derive any cost benefit, crucial in this margin-driven business, from starting a PTA plant. Even with its 3.5 lakh tonnes capacity it is unlikely to match Reliance, which is setting up a third plant of 3.5 lakh tonnes at Hazira that will take its PTA capacity to 9.5 lakh tonnes in 1998. Reliances large capacity is likely to give it a substantial cost advantage.

It is an open secret that Lohia is raring to take on the Ambanis. He has big ambitions, but where is the cash? asks Orchids Jain.

Lohias cash crunch has become painfully visible in recent weeks. His company has outstanding debts of nearly Rs 130 crore and he has had to postpone $2.5 million due to equipment supplier IKB. Even a letter of credit for Rs 35 crore drawn on Bank of India has been dishonoured. It has also not been paying Rs 20 crore interest due on their non-convertible debentures to IFCI.

The company is expected to clock in zero net profits this fiscal year ending March 31, 1998. For the first half ending September 1997, the company had reported a net profit of around Rs 1.7 crore which is unlikely in the second half. Although the turnover is likely to climb to around Rs 1,550 crore, the net profit is likely to be zero because Indo Rama has to clear outstanding debts (Rs 130 crore) and cough up Rs 73 crore as interest payments. As always, we will get lousy or no dividends this year. But what else is new? asks R Singh, a small shareholder.

Indo Ramas earnings per share (EPS) have been in a free-fall for the past four years. From around Rs 9.08 in fiscal 1993-94, the estimated EPS today is 10 paise. This is thanks to the companys profits plunging from Rs 21.4 crore in 1993-94 to Rs 1.7 crore in 1997-98, even while its equity has increased from Rs 32.01 crore to Rs 155 crore over the same period. In fact, from 1989, Indo Rama has had one public issue, three rights issues and one global depository receipt (GDR) issue.

Unlike Reliance, Indo Rama shareholders have never been rewarded, says a merchant banker. I dont think they can raise capital through a public issue.

This leaves Lohia with no option but to fund the projects by roping in joint venture partners. By July this year, Indo Rama will sign a shareholders agreement for the Rs 1,360 crore PTA project which will be financed by equity worth Rs 420 crore, while the balance Rs 940 crore will be tied up by debt. Lohia plans to take up equity worth Rs 252 crore involving a 60 per cent stake. Japanese technology collaborators Mitsui Petrochemical Industries Ltd and Itochu Corporation will provide the rest of the 40 per cent. However, Itochu is insisting on a minimum equity holding of 26 per cent. This might force Indo Rama to bring down its share from 60 per cent to 54 per cent, thereby transferring the required six per cent to Itochu.

Lohia hopes to finance Indo Ramas part of the equity stake through its internal accruals and cash profits. And hopes to finance the project out of the cash profits of Rs 1,000 crore which he expects Indo Rama to generate in the next three-four years. This is a rational projection because the polyester industry is witnessing a tremendous growth, says Lohia.

There are doubts whether there will be enough in Indo Ramas kitty. The company has been operating on wafer-thin margins for some time. In the last fiscal, the company made a net profit of Rs 1.55 crore on a turnover of Rs 1,185 crore. In fact, analysts are quick to point out that these profits happened because of creative accounting practices. Among them: changing depreciation rates which reduced depreciation by 13.7 crore; deferring expenditure worth Rs 10.8 crore; and not making a provision of Rs 8.6 crore for the decline in the market value of the companys investments. Had this not been done, the company would have shown a loss of over Rs 30 crore, says Rohit Chowdhury, chartered accountant with R Sarkar & Company.

Even if Lohia manages to cough up the equity, theres no guarantee that he will manage loans from FIs. Today, these lenders are giving the PTA industry a wide berth because of the downturn in global prices, says an IFCI official. ICICI and IDBI have already refused to finance Hari Singh Rankas (Modern Group) Rs 1,660- crore PTA project.

Lohias dream will only come true if polyester prices firm up. In March 1998, Lohia expects prices to improve, from Rs 41 per kg to Rs 46 per kg for polyester staple fibre and from Rs 57 per kg to Rs 60 per kg for polyester filament yarn. If that happens, Indo Rama can start building up that war chest. If it doesnt, Lohia will just have to live with remaining number two.